GBP/USD: Negative bias into mid-year amid political noise and more patience BoE – CIBC

The extension of UK political uncertainty, while markets look to be pricing in too much Bank of England (BoE) tightening, point towards a negative GBP/USD bias into mid-year, economists at CIBC Capital Markets report.

Negative sterling bias maintained

“The BoE is set to consider their own balance sheet moderation once rates reach 0.5%, and we expect February to witness back-to-back rate hikes for the first time since 2004. BoE QT will see the bank no longer looking to reinvest maturing gilt proceeds, and that balance sheet.”

“The combination of slower growth and QT points towards a period of policy inertia, potentially for at least six months, in contrast to the 59bp of hikes discounted by May. The correction in assumptions is likely to drag on sterling valuations.” 

“UK political uncertainty is set to remain evident while the current account deficit status of the UK remains a concern should hot money inflows prove to be compromised, pointing towards maintaining a negative GBP/USD bias into mid-year.”